Is It Time to Sell Your Business? Key Questions to Ask

Sales of small businesses all but dried up after the recent economic downturn, but there’s reason for optimism. A recent BizBuySell survey of nearly 5,000 business brokers found that they “saw an increase in business-for-sale transactions in 2012 and expect even more businesses to change hands in 2013.” Thinking now might be a good time to sell your small business? Here are some key questions to ask yourself before taking the plunge.

Are you ready to let go?

Before selling, it’s important to make sure you’re emotionally ready to do so. Have you run out of passion for your business? Barry Moltz, a small business consultant in Chicago, says the symptoms indicating a loss of passion can be detected by answering the following four questions: “Are you still excited to go to work every day? Do you still believe in mission of your business? Do you want to see how your business will evolve? Do you like the partner you’re working with?” If you’ve repeatedly answered “no,” this may be the first step toward acknowledging you’re ready to move on.

Moreover, “the new owners will come in and make changes; they earn the right to make changes they want. They may change the name of the company. Are you going to be okay with that? What does your spouse think?” How you react often depends on your age and life stage. “I get involved with family businesses that have been around 20-30 years. “If you’re a younger person, and (your intention is to) turn over a business, it’s different. Most small firms are lifelong kinds of businesses in which the owners didn’t create to sell it.” So letting go is much harder.

How healthy is your company’s cash flow?

The adage “cash is king” may sound trite but couldn’t be truer in today’s slow-growing economy. Buyers look for companies that “have ongoing cash flow,” says David Lavinsky, President and Co-Founder of Growthink, a New York City-based small business consulting firm. Cash flow is essentially the movement of money in and out of your business. Inflow includes cash generated from sales of goods and services, loans and lines of credit, and asset sales, while outflow represents expenditures, loan payments, and business purchases. “Will your business continue generating cash and profits for the acquirer?” asks Lavinsky. If your cash flow is increasing, it may be a good time to sell, because people want to buy on the upswing, says Moltz. The next three questions address what Lavinsky refers to as “systems in place” that you need in order to maintain that momentum. (You’ll have time to establish these systems; typically it can take six to nine months to sell a company.)

What is your concentration of customers?

“You need to diversify your customer base in case you have too few customers taking on a large portion of your business,” says Lavinsky. And then, “among your biggest customers, is there a personal relationship between you” that the acquirer would not be able to sustain? You might have to be willing to stay on board for a year or two to smoothly transition these relationships to a new owner, says Lavinsky.

The new owners will come in and make changes … Are you going to be okay with that?

What’s your revenue risk?

“Buyers typically look for revenues over the past two years, this year’s revenues, and future growth potential,” says Lavinsky. “You want to show how you can grow your revenues in 2013; to paint a picture so that when they value your business, they value it based on future potential, not just past performance.”

What unique business assets can you build this year?

A business asset is a resource you create (in order to produce) future economic value. “Say you brought on a new distributor or partner that the acquirer will be excited about, like a big tech partner, that would be valuable for the buyer to take over. Or you retrain employees or recruit new ones who can help you build a lead generation system that new company can leverage. These are assets that the buyer will pay a premium for,” says Lavinsky.

Are your books in order?

Make it easy for potential buyers to look at your financials and use them to value your company. Get all your records in one place: rent and lease agreements, agreements with customers, employees, distributors, and vendors, and, most importantly, your key financial documents: balance sheet, income statements, cash flow statements, and statements of shareholders’ equity.

Are you prepared to offer financing?

Since the 2008-09 recession, many banks have strengthened their lending standards, making it tougher to obtain loans. “In today’s market, seller financing is essential,” Mike Handelsman, Group General Manager for BizBuySell.com and BizQuest.com, recently told Inc. magazine. “That means you’ll be required to take a minimum of 20% of the sale price in the form of a buyer note that the buyer will pay back over time, with interest.”

As market conditions continue to improve, however, seller financing may become less important. The stronger your financials look, the better chance the acquirer may be able to get financing, Lavinsky says. “You need to show your business can reduce the risk of defaulting on a loan and that you have future revenues coming in. Banks look at whether your business will continue to spin off cash and profits, has a low concentration of customers, and that customers aren’t going with you. If you can say: ‘We’ve been selling our product to XYZ retailer for X number months and have purchase orders dated for the future’—anything to show the business will continue to grow after you leave.”